Un-rigging the Rate-Shock Debate

The truth about what those healthy 25-year-olds will pay

Many of us have been wondering whether it’s possible to have an honest, reasonable debate about Obamacare. To my pleasant surprise, one may finally be starting.

It’s about the same subject that got me all worked up early this week: Whether Obamacare will cause “rate shock” among people buying insurance coverage on their own, through the new insurance exchanges. And if you pay attention to the right people, you’ll discern a basic consensus about the facts.

The consensus goes like this: Some people buying coverage on the exchanges will pay more for insurance than they do today. Some people will pay less. The benefits will be better and the policies will be more widely available, but those changes require their own trade-offs, like forcing some people to get more coverage than they want. The insurance offerings from California—the announcement that set off this debate—were better than most of us were expecting. But the numbers in other states could look a lot worse.

Among these writers, who span left and right, plenty of disagreement remains.1 Is it fair to ask some young and healthy people to pay more for their insurance? How will the people who see higher premiums react? What will that reaction do to the system as a whole? But, as The Daily Beast's Megan McArdle put it, these questions are in many ways more “theological” than “technical.” They come down to values and to predictions that, at this early date, are simply impossible to confirm.

Still, I think many Obamacare critics and quite possibly some of its supporters don’t fully grasp the significance of one key factor: the subsidies.

To review: Obamacare reorganizes the market for people buying coverage on their own, so that they are no longer at the mercy of insurers who pick and choose the healthiest customers. This "non-group" market is pretty small, in relative terms: The vast majority of Americans will continue to get insurance from employers, Medicare, or Medicaid. But for insurers who sell non-group coverages, the rules for conducting business are changing dramaticaly. Under Obamacare, these insurers must provide all beneficiaries with a core set of benefits, for example, and they can't deny coverage to people who have pre-existing conditions. Insurers are reacting to this by raising premiums. They really don’t have a choice, since they can no longer skimp on benefits or avoid taking on sick people.

If you want to make Obamacare look really bad, you stop telling the story right there. You imagine a young, healthy person who can get cheap coverage today, compare what he’d pay under Obamacare, and, then, declare that Obamacare has “doubled premiums.” But the real story doesn’t end there. And one big reason is that Obamacare also provides people with financial assistance. This assistance, which comes in the form of tax credits, has the opposite effect of the regulations. It makes insurance less expensive.

Not everybody can get these subsidies: They are based on income, so that people who earn more money get less help, and people with incomes of more than four times the poverty line get no assistance at all. (That’s roughly $46,000 a year for an individual and $94,000 a year for a family of four.) But the subsidies are a lot bigger and benefit way more people than many people realize. Most of the commentary I’ve seen doesn’t really convey that.

So let me give it a try. I started with the same fictional person Obamacare critics have used in their calculations: a 25-year-old, non-smoking man. And, using the Kaiser Family Foundation subsidy calculator, I ran the same comparison that Forbes columnist Avik Roy famously did: What that 25-year-old man would pay for the cheapest policies currently on eHealthInsurance, versus what he’d pay for a roughly comparable “bronze” policy under Obamacare. Then I added one variable: income.

It’s a comparison rigged to make Obamacare look bad for the same reasons Roy’s first comparison did. Just for starters, it doesn't account for the fact that plenty of non-smoking 25-year-olds can’t even get those "teaser" rates they'd find online. But it still makes my point, as the graph below shows.

A 25-year-old single man, making $35,000 a year, can expect to pay the full price of a bronze policy: About $2,511 a year in 2014. We can argue whether that constitutes true “shock,” given that it’s far less than employer policies cost. Still, it’s a lot more than the $1,104 premiums Roy found on eHealthInsurance. The same would be true for a 25-year-old non-smoker with even higher income. These are the young and healthy people who will end up paying more. That's important and must be part of conversation.

But look what happens when we think about somebody making less money. If this young man’s annual income was $25,000, he’d pay just $1,184 a year. That’s basically the same as the eHealthInsurance bids, give or take a few six packs of beer. Dude! At $20,000 a year in earnings, the expected bronze premium comes all the way down to $481 a year. And at $15,000 a year, insurance is free. That’s right, the premium would be zero dollars. (If you're interested, you can run the same calculations for silver policies, which are more generous, although the comparison to cheap eHealthInsurance plans becomes even more unfair to Obamacare. You can also run it for older people, or consider the possiblity of catastrophic-only coverage that Obamacare makes available to people younger than 30.)

If you hang out with reasonably well-paid professionals, and don’t have a great sense of income distribution, you might assume—as some writers have suggested—that only a “select few” or “tiny minority” of people will get these steep discounts. Think again. Median personal income for a 25-year-old, according to Census data, is also right around $25,000.

By itself, that figure doesn’t tell us how many people will spend more for insurance next year, versus how many will spend less. We’d have to know how that income matches up to insurance status, how many people are part of couples rather than singles, and so on. But experts I’ve consulted think the number of people who will end up saving money is larger than those who will be writing bigger checks.

One of those experts is Larry Levitt, who is senior vice president at the Kaiser Foundation and, as I may have mentioned, one of the smartest and most scrupulously honest experts I know. Here's what he told me, via e-mail:

People with pre-existing conditions are excluded from this market altogether now, so current premiums are distorted. Guaranteeing insurance to everyone will tend to raise premiums somewhat. But federal tax credits available to low and middle income people should more than offset that increase, meaning that most people now buying their own insurance will end up paying less under the health reform law.

Linda Blumberg, senior fellow at the Urban Institute, co-wrote a paper on this topic specifically and has made her own projections (using Urban's model) on how Obamacare will affect different groups of people. She notes that the number of people saving money might be even larger once you take into account other ways in which even the cheaper Obamacare plans provides more security than online alternatives available today.

Based on our analyses, I do expect that more people will pay less in premiums than will pay more, largely due to the financial assistance with some other contributing factors as well, but many more will save on the total costs of medical care (premium plus out-of-pocket combined), premiums will definitely be more stable over time (allowing for better financial planning and more consistent coverage), and when the unthinkable happens, the person will know that they will be able to access the care they need, which is often not the case today in the nongroup market.

Obamacare critics are quick to point out that subsidies aren’t free. They are correct. To finance the subsidies, the law pulls money from other sources—like higher taxes on the wealthy and reductions in what Medicare pays for goods and services. And while the number of people paying less for insurance in 2014 may outnumber those paying more, the unlucky ones looking at higher bills won’t be happy about it. If you’re a single 25-year-old man making $30,000 a year, you’re definitely not poor. But you’re definitely not rich, either, particularly if you live in an expensive coastal city. And there are going to be plenty of people in that situation, in absolute terms, whether or not they represent a large proportion.

Whether these tradeoffs are worthwhile, whether they constitute a betrayal of Obama's original rhetoric, and whether they undermine the system's sustainability are important questions—ones we can, and should, keep debating. But a conversation about insurance rates should begin with the recognition that the number of people paying less, in some cases a lot less, is far from trivial. They may even be the majority.

Jonathan Cohn is a senior editor at the New Republic. You can follow him on twitter @CitizenCohn.